South Korea's Pro-Foreign Investment Policies Made it Literally Overshadow North Korea
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| When you have the taste of capitalism for the first time! |
There are really a lot of misconceptions about the free market and foreign investments. It would be a good time to write about the differences between North Korea and South Korea. I remembered studying Asian history in high school but it seems it was a rushed course. I guess Asian history is now taught in middle school and high school in the K+12 program. Like economics, it seems that Asian history and world history are treated like "just requirements to pass". Economics is linked to history and vice-versa. It would be good to talk about both Koreas for another economics-related post. Korean history was taught in high school but in a glimpse. I wish I had an updated Korean history textbook in English. We saw the progress of the two Koreas. Sadly, high school economics during K+10 was so rushed though I did learn a lot with a teacher as fierce as the late Miriam Palma Defensor-Santiago.
Election seasons reminded me of how I was discussing the need for foreign direct investment (FDIs). The discussion ended up sour when the person said that only FDIs will get rich if the Philippines will let them invest. Other comments on social media such as Facebook will show fear-mongering comments such as that the foreign investment act is to let China take over, that the Philippines should just learn to do everything itself (all the while they are using the American-made Facebook and presumably an iPhone), and we know how ironic it can get. It would be good to give a review lesson on the great divide between North Korea and South Korea. The results are so contrasting you'd have to have your eyes checked not to see it! Okay, I'm myopic and I've been wearing glasses in my college days to copy notes and took them down when I'm not doing so. The great contrast is really there.
The great contrast between the two Koreas is like day and night... literally!
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It's interesting that a National Geographic article from 2014 had shown how North Korea is lagging behind in progress. Just reading it made me think of how traditional Communism has failed in its promise of equality. This excerpt towards the end of the article makes me feel why North Korea's "self-reliance" is self-destructive:
Satellites have traditionally been the best tools for observing North Korea; they capture detailed views from far beyond sealed borders. Starting in 1948 with Kim Il Sung, the grandfather of the current North Korean supreme leader Kim Jong Un, the country has shunned most of the world.The North Korean government has refused offers of food and energy aid in exchange for a commitment to curtailing its nuclear energy ambitions. International inspectors have been denied entry, which has resulted in increasingly harsh sanctions led in large part by the United States and South Korea. China remains the staunchest of the north's few allies.In her 2009 book Nothing to Envy: Ordinary Lives in North Korea, Barbara Demick described the effect darkness has on culture.Streets become too dark for people to walk, limiting social interactions outside of daytime work hours. No one can watch TV or consume the limited amount of media allowed by the government.Still, some parts of North Korea never go dark. Several government buildings, as well as Kim Jong Un's personal palace, stay lit at all times. Also illuminated around the clock: the famous 560-foot (171-meter) Juche Tower at the center of Pyongyang. It stands as a lonely symbol of nationalism and self-reliance, whatever the cost.
There's a saying that Communism is only good when you're the one in power. The great contrast is how even China, its own staunch ally, still overshadows it. The description by National Geographic as a sad symbol of nationalism and self-reliance is totally right. The capital city of Pyongyang is a marvel to the rest of North Korea. The government controls too much. The darkness is a symbol that electricity services are expensive and of low quality. The government of North Korea enjoys the resources at the expense of others.
The soap opera known as Crash Landing on You would also show the stark differences. It may just be a work of fiction but sometimes fiction is used to reveal realities people need to have. The great Jose Rizal wrote both Noli Me Tangere and El Filibusterismo to expose the abuses of the Spanish government. If you've seen it then take a look at the scenes. North Korea was shown to have inequality as those in power live luxurious lives. Meanwhile, those who are citizens are still using salt drums to preserve meat, they have very limited electricity (to which a funny scene ensued that a stationary bike was used as a generator), and how the North Korean soldiers suffered a culture shock. It might be entertaining but it's also very educational. The soldiers eventually had their taste of free markets and were shocked at how wonderful South Korea is. It was a fun and educational watch too.
South Korea is no "self-reliant" state
In a broad sense, what policies does the South Korean government use to oversee foreign investment?
In a broad sense, Korea is quite a foreign investment-friendly state. However, we would say the Korean government approaches foreign investments coming into Korea and foreign investments going outside of Korea differently. Generally speaking, foreign investments coming into Korea are freely allowed, as long as they are properly reported. On the other hand, foreign investments bounding outside of Korea are more regulated and often require prior approval from the Korean regulators such as the Bank of Korea.How has the 2017 Foreign Investment Promotion Act (FIPA) altered the regulation of foreign investment in the country?
The Foreign Investment Promotion Act (“FIPA”) was first enacted in 1998. Since the enactment of the FIPA, the Korean government has implemented policies to provide several incentives to foreign investors in order to attract more foreign investments into Korea. These incentives include tax incentives, subsidies, and foreign investor visas.In the past, the Korean government’s interest was the amount of investment made by the foreign investors. However, in my view, more recently, the Korean government’s interest has shifted to the quality of the investment by attracting foreign investments in high value-added industries.Are there other significant laws governing how foreign investment is handled?
FIPA applies only to certain foreign investments. The primary form of foreign investments first coming into Korea is equity investment (e.g. corporate formation). FIPA applies to a foreign investment whereby the foreign investor purchases shares of a Korean company in the amount of at least KRW 100 million (approximately USD 88,370) and the foreign investor will own at least 10% of shares in the Korean company as a result of the investment. In other words, if the foreign investor’s investment is less than KRW 100 million, we will have to look if any other law or regulations apply. For example, in such a case, the Foreign Exchange Transactions Act (as well as regulations promulgated thereunder) could apply.
Did South Korea get invaded and become a "colony of foreign investments" as some people like Hilario Davide Jr. and Teodoro Casino of Bayan Muna would suggest? South Korea may have had some economic problems later had a slowing economy. One of the causes of that event in 2014 isn't caused by FDI. In fact, Global Asia shares this insight of a slower economy but it's nowhere near as bad as protectionist states:
SOUTH KOREA’S SLOWING ECONOMY
In recent years, the South Korean economy has slowed down, mirroring Japan’s experience. The average annual economic growth rate was 9.2 percent in the 1970s, 9.8 percent in the 1980s and 6.6 percent in the 1990s. But growth fell to 4.2 percent in the 2000s. The picture is even worse in recent years, with its economy only growing by 3.7 percent in 2011, 2.0 percent in 2012 and 2.8 percent in 2013. Many South Korean industrial giants such as Samsung and Hyundai have increasingly moved their new investments abroad to low-cost regions such as South Asia and Eastern Europe. Between 1995 and 2010, South Korea’s largest manufacturing firms shifted 17 percent of their production overseas.1 As a result, total domestic employment in such companies fell by 2 percent annually, and the share of Korean workers employed at large South Korean companies fell by a third, from 18 percent to 12 percent.
Due to South Korea’s deteriorating competitiveness, foreign direct investment (FDI) has worsened in recent years. FDI outflows rose from $6.1 billion in 1997 to $35.1 billion in 2013, an increase of 470 percent, while FDI into South Korea rose from $6.9 billion to $14.5 billion, or only 108 percent. In 2013, the level of FDI into Korea was just one-fifth that of Singapore, which is smaller than Seoul. South Korea attracted less FDI in 2013 than Thailand, Indonesia or Malaysia. While South Korean wages are relatively high compared to competitor nations, a study by the Conference Board in the United States found that South Korea’s hourly labor productivity stands at 48 percent that of the US, ranking 30th in the world, even lower than Greece. Reflecting the deteriorating business environment, 40 percent of Korea’s top 30 chaebol firms found their operating income falling short of covering even their interest expenses in the past two years.
A 2014 World Economic Forum survey shows South Korea’s international competitiveness falling to 26th, the lowest in 10 years, while other Asian countries have retained higher rankings, including Japan (6th), Hong Kong (7th), Taiwan (14th) and Malaysia (20th). The South Korean banking system ranked especially poorly at 122nd, while the entire Korean financial system fell to the bottom of the list at 144th, with the return on assets of South Korean banks at only 0.38 percent, the lowest in Asia and outperformed by Kenya (24th), Ghana (62nd) and Uganda (81st).
In short, a reading will reveal that the decreasing competitiveness within South Korea and an outflow of FDI caused the slowdown in 2014. Yet, these are all but temporary setbacks which prevented it from turning like its close-minded neighbor North Korea. Yet, South Korea still remains a testament to North Korea's self-reliant state. South Korea may have some growth slowdowns but it can be better remedied than what North Korea is doing right now. North Korea still tries to establish a national industry utopia but it's too dark. South Korea's more FDI-friendly policies made its woes nowhere near as serious as North Korea's.
A recent report from the 2022 Index of Economic Freedom reveals this about the South Korean economy with a world ranking of 19:
South Korea’s economic freedom score is 74.6, making its economy the 19th freest in the 2022 Index. South Korea is ranked 5th among 39 countries in the Asia–Pacific region, and its overall score is above the regional and world averages.
Over the past five years, the South Korean economy has followed a track similar to those of many other countries: slowing growth from 2017 through 2019, negative growth in 2020, and recovery in 2021. During the same period, levels of economic freedom have remained largely unchanged. With significant score increases for property rights and judicial effectiveness offset by losses in business freedom and a higher tax rate, South Korea has recorded a negligible 0.3-point overall gain of economic freedom since 2017 and remains in the middle ranks of the “Mostly Free” countries. Fiscal health is robust, but investment freedom and financial freedom are relatively weak.
There are still some areas that South Korea needs to fix such as having better investment freedom and financial freedom. South Korea's bottlenecks are nowhere near as bad as what the 2022 Index of Economic Freedom reveals about North Korea:
North Korea’s economic freedom score is 3.0, making its economy the 177th freest in the 2022 Index. North Korea is ranked 39th among 39 countries in the Asia–Pacific region, and its overall score is below the regional and world averages.
North Korea’s economy is estimated to have shrunk by 8.0 percent in 2020 and by a further 5.0 percent in 2021. Commercial and business activity is severely repressed, and the country has been ranked lowest in the world every year since the inception of the Index in 1995. Chronic structural problems beset one of the world’s most centrally commanded and least open economies. In a country that lacks even the most basic policy infrastructure of a free-market economy, individuals and businesses lack any economic freedom whatsoever, both in principle and in practice.
References
https://www.nationalgeographic.com/pages/article/140226-north-korea-satellite-photos-darkness-energy
